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Treasuries set for best week in two months after Trump whiplash

Bloomberg

(Bloomberg) -- Treasuries are poised for their best week since early September after a volatile five days of trading dominated by Donald Trump's victory in the presidential election.

Long-dated yields Friday further extended their retreat from multimonth highs reached on the election results. Short-dated tenors erased declines as several more Wall Street banks including Goldman Sachs Group Inc. forecast fewer Federal Reserve interest-rate cuts next year than previously.

Still, the huge run-up in rates that greeted Trump's win is mostly gone. Yields on 30-year bonds, which bore the brunt of Wednesday's losses amid fear the incoming administration's policies will boost inflation, retreated to 4.48% — taking a drop over the past five days to about 10 basis points.

The US vote unsurprisingly dominated markets. So-called Trump trades — those that stood to benefit from his win, including bets against US bonds and on dollar strength — seesawed as investors sought hedges before election day, only to pile back in as the results became clear. Those wagers eased as the week progressed and as Fed Chair Jerome Powell said it was still too early to consider the impact of the next government's fiscal policies.

"Market participants are thinking that policy measures may not come as soon as previously thought," said Evelyne Gomez-Liechti, a rates strategist at Mizuho. "This unwinding looks like a tactical move."

Forecast Changes

The election results nonetheless have prompted several Wall Street banks to forecast a slower pace of Fed interest-rate cuts next year assuming the new administration's policies will take effect.

Two-year Treasury yields — more sensitive than longer maturities to Fed rate changes — erased a decline of more than 3 basis points and then rose about 6 basis points Friday after forecast changes by economists at Barclays, Goldman Sachs and TD Bank.

The Fed lowered its policy rate on Thursday by a quarter point, in line with expectations, and forecasters continue to look for another cut on Dec. 18, policymakers' final meeting of the year. The rate cuts, which began in September with a half-point move, are intended to forestall labor-market weakening now that inflation has declined toward the Fed's 2% target.

The banks that changed their forecasts previously looked for quarter-point cuts at each of the Fed's first several meetings of 2025.

Barclays expects two quarter-point cuts next year versus three previously, based on "the outcome of the US elections and the likely implementation of import tariffs and tighter restrictions on immigration."

TD look for a pause in cuts during the first half of 2025, while Goldman Sachs predicted the Fed will skip May based on Powell's comments following this week's move.

Volatility Surge

Uncertainty heading into the US election boosted a gauge of Treasuries volatility to the highest in more than a year. While measures of likely price fluctuations have moderated, with the ICE BofA MOVE Index down the most this week since April 2023, investors remain on edge about whether Trump will fully implement the tariffs and tax cuts he touted on the campaign trail.

That's fueled warnings about lurking 'bond vigilantes' — a term coined by Ed Yardeni in the early 1980s to describe investors who seek to exert power over government policies by selling their bonds, or threatening to do so. Powell, meanwhile, described the path of US debt as unsustainable at the press conference following the Fed's decision to lower interest rates on Thursday.

Still, US debt auctions this week went off without a hitch, including a sale of 30-year securities that attracted strong demand. And the Fed's decision to ease monetary policy further and signal more cuts to come gave investors another reason to buy Treasuries.

What Bloomberg strategists say...

"Those moves don't mean that the markets have moved on from their earlier concern about the Trump trade. Rather, the rally in Treasuries and the respite in dollar strength must be seen in the context of the relentless increase in yields we saw since the start of October."

—Ven Ram, MLIV cross-asset strategist

"A buyers' strike on US debt really shows no signs of happening," said Tom Roderick, a portfolio manager at hedge fund Trium Capital. "The US is the global reserve currency, investors will continue to park their assets in the US unless there is another alternative."

--With assistance from Alice Gledhill, Alice Atkins, Constantine Courcoulas, Michael Mackenzie and Carter Johnson.

(Updates yield levels throughout.)

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